After being introduced by Rector Kharkhordin, Jordan began with a warning you would not expect from a US native – that he may from time to time switch back into Russian out of habit. Indeed, Jordan, a US citizen, has spent the bulk of the last twenty years living and working in Russia.
After graduating from NYC, where both of his parents attended, Jordan moved to Moscow and got his start at Credit Suisse First Boston, which with Jordan's help became a leading investment bank during Russia's privatization in the mid-1990s. Originally, Jordan had wanted to be a US diplomat, but when he realized he would not be placed in Russia, he went into finance. He set up Renaissance Capital with Vladimir Potanin and soon after that Sputnik. In the early 2000s, Jordan served a controversial stint as chief of Gazprom-Media's NTV until 2003. Jordan is also a member of the Council of Foreign Relations.
Jordan began his talk by highlighting the positive developments in Russia's economy in the early 2000s. These included tax reform, increased investor confidence, and minimal but effective investment decisions. Additionally, there was consumer led growth that came as a result of the increased wealth from rising oil prices.
This growth, however, had some negative implications and led to what is known as "Dutch Disease" – as the ruble got stronger, other sectors of the Russian economy, especially manufacturing, became uncompetitive and suffered. Additionally, in the mid-2000s much of the economy was renationalized and thus, argued Jordan, became less productive.
Now, Jordan said, Russia's capacity has been used up; the easy money that came with minimal investment has already been made and Russia needs more significant capital and fundamental investment. Though foreign investment is relatively healthy, notwithstanding the damage already done by the Ukrainian crisis, domestic investment is lacking; Jordan used the recent acquisition by Mikhail Fridman as an example. Fridman, currently Russia's second richest man, sold his share of TNK in Russia and bought RWE, a German energy company.
"The irony is if you look at Ford, GE, Proctor and Gamble, they have made more money per dollar invested in Russia than in any other emerging market in the world." Jordan continued to explain that the problem is that these companies' boards do not let them invest in Russia because of the perceived risk the country presents: "Events [in Ukraine] have heightened the lack of confidence that could have a bigger effect than macroeconomic issues." According to Jordan, this confidence problem stems from a lack of a transparence in decision making, inadequate rule of law, and low asset security – he pointed to the case of the expropriation of Yukos in 2003. "How can you plan to go forward is a big issue," Jordan left for the audience to ponder.
Jordan then cited seven key areas of the Russian economy that need to be addressed: corruption, diversification from oil and gas and rebalancing from state dominance, creation of efficient capital market, tax reform, efficient infrastructure investments, housing improvement and labor mobility, education and public health.
Jordan then went on to explain some of these in more detail, starting with the overdependence on fossil fuel revenue. "I can't stress enough how much Russia needs to get away from a resource economy. Russia should invest and be a leader in it; it would be foolish if it didn't. But we need to also diversify because when we see a drop in oil prices, which is likely – partially because of US production – it will be a huge problem." Jordan estimated that the Brent price of oil could drop down to $75 per barrel by the end of the year. The Russian budget is balanced on a $115 per barrel price, he noted.
Jordan moved to another problem, the puny sum of domestic savings in Russia. Where Brazil – whose economy is similar to that of Russia's in many regards – has about $1.1 trillion in domestic savings, Russia has only $134 billion. This translates to a poor national pension fund. Jordan had built the 8th largest pension fund in Russia through Sputnik Group, but then sold it in 2012 right before Russia's pension reform, which Jordan views as a negative development. "There is no legislation to stimulate savings," he said.
Other problems Jordan pointed out were a high corporate tax, underinvestment and inefficient tender processes in infrastructure development (it is 3 to 4 times more expensive to build a road in Russia than in Sweden), underinvestment in education ("still living off of investments made in the 60s and 70s"), and an inadequate healthcare system.
"We have come to a crossroads. We have used up all existing capacity. Now, it is about hard work and reforms. First and foremost, we need to build confidence. Build domestic capital; the real money is FID, but it's not enough. We have to invest in housing stock. Have to invest in education and healthcare." Thus Jordan finished his presentation and moved on to the question and answer session.
The first question came from Rector Kharkhordin, who asked simply, "Why is Putin not doing this?"
Jordan then explained that though Putin is one of the smartest presidents he has ever met, his administration is getting old. The people have just been recycling and trading positions since 2002; this lack of new people, according to Jordan, is a significant hindrance to meaningful economic reform.
A later question led Jordan to explain why Russia is often considered a less attractive place to invest than a country like Turkey, where political instability is arguably an even more severe problem.
Jordan began his answer by recounting a time in 2003 when he was invited to visit Putin, who he called the smartest president he has ever met. During the visit, Jordan pushed Putin for more economic reforms and Putin responded that the Russian people weren't ready yet, giving this anecdote: "Imagine two farmers living next to each other. One farmer has one cow and the other has two. What do you think the dynamic will be? In the US, the farmer with one cow will want to have three to beat the other. What do you think the dynamic would be in Russia?" Putin asked Jordan. Putin answered his own question, "The farmer with one cow is going to kill the other farmer's cow so that they can both have only one." Turkey, Jordan continued after the anecdote, is perceived as being closer to Europe and so people may think they're safer there. Also, there is a lot of negativity in the US about Russia, much of which is driven by neo-cons, like McCain, Jordan said. "Russia has an image problem."
A later question raised the controversial issue of Crimea, and the sanctions that have come as a result of the region being added to Russian territory. "I think with politics, I am not sure Putin had another choice." As to the economics, Jordan said that investment confidence had already been significantly damaged, and it was in the interest of the Russian economy to resolve the crisis as soon as possible. Investors are shelving or perhaps cancelling deals that had been in the planning before the crisis. "The quicker people talk about the ramifications for the economy, the quicker we'll conclude the crisis."
Nicholas Watt
